Did Microsoft guarantee BayStar’s investment in SCO?

New filings in the ongoing SCO v. IBM case raise questions about the extent of …

In the ongoing saga of SCO v. IBM, one peripheral question has been the extent of Microsoft's financial support for SCO. Groklaw has dug up an interesting bit of data in the case, namely that Microsoft supposedly promised venture capital firm BayStar that they would guarantee their multimillion-dollar investment in SCO.

Buried in IBM's recent motion for summary judgment against SCO is a Declaration from BayStar general partner Larry Goldfarb. Near the beginning of the long-running legal soap opera, BayStar invested $50 million in SCO. In exchange for their investment, BayStar received 20,000 shares of preferred stock in SCO.

In his declaration, Goldfarb testifies that former Microsoft senior VP for corporate development and strategy Richard Emerson discussed "a variety of investment structures wherein Microsoft would 'backstop,' or guarantee in some way, BayStar's investment." Goldfarb then said that after BayStar committed the $50 million to SCO's cause, Microsoft "stopped returning my phone calls and e-mails, and to the best of my knowledge, Mr. Emerson was fired from Microsoft."

As SCO's case began showing more holes than a slice of Swiss cheese, BayStar began to regret that hefty investment. In April 2004, BayStar asked SCO to redeem its preferred stock for cash, accusing SCO of breaking the terms of the investment agreement. A few days later, BayStar pressed its case by calling for a change in management at SCO, saying that the company's management team was spending too much time and money dissing Linux instead of concentrating on its increasingly costly battle against IBM.

Things got messier with the two companies finally agreeing in June 2004 that SCO would repurchase $40 million of BayStar's stock for $13 million. However, before that deal was finalized BayStar went on the offensive again, accusing SCO of misleading it about the potential for revenues from its SCOsource UNIX licensing program. For the first two quarters of 2004, revenues totalled $30,000, instead of the millions SCO had told BayStar it expected. SCO and BayStar finally worked out a mutually acceptable agreement, and the divorce became final later that year.

Questions have been raised about the extent of Microsoft's involvement not only with BayStar, but with SCO itself. Microsoft stood to gain in the event of a SCO victory, as Linux would become a much-less-attractive option for companies looking to wean themselves from UNIX or even Microsoft's own commercial offerings. In March 2004, an e-mail surfaced that indicated Microsoft had played a part in hooking BayStar up with SCO. At the time, both BayStar and Microsoft denied that the Redmond, WA-based software giant had any financial involvement in the deal, although it did purchase a UNIX license from SCO in 2003, ultimately spending $16.6 million on licensing fees.

In the big picture of SCO's disastrous legal strategy, the extent of Microsoft's involvement—if any—will ultimately be little more than a footnote in an obituary. SCO's case has proven to be so weak that it is difficult to envision any amount of investment by Microsoft, BayStar, or any other capital firm that would have us saying positive things about SCO and its prospects for survival.